Fed signals higher for longer, yields spike

As expected, the Federal Reserve did not raise interest rates at their latest meeting this week. What was less expected, was their Summary of Economic Projections (SEP), which outlines the future expected levels of interest rates, GDP, unemployment, etc., showing most Fed participants expected interest rates to remain at the current level well through 2024. In prior projections, interest rates were seen coming down sooner. This caused the yields on the 10 and 30-year treasuries to surge to new multi-decade high levels (~4.5% and ~4.55% respectively). This also caused stocks to sell off dramatically.

• The Fed’s projections have been wrong for a long time, so there is little reason to put too much stock in the new information
• That said, the Fed seems to be incorporating the recent strong economic data into its adjustment
• Chairman Powell, in the press conference following their announcement, tried to strike a balanced tone by continuing to stress the importance of bringing down inflation, while using the word “carefully” in reference to future policy
• When asked if a “soft landing” was their base case, the Chairman said it was not, however, their own projections point to exactly that kind of scenario
• All in all, it does seem as if higher interest rates are slowly filtering through the real economy
• Economic indicators, however, continue to show resilience, so it is hard to determine direction, barring an exogenous shock

UAW strike continues, more to come?

The United Autoworkers Union (UAW) seems likely to continue the strike that began last week. The two sides still seem far apart, with the UAW demanding 40% wage increases over four and a half years, while the automakers seem to be offering something closer to 20%. Elsewhere, the writers’ union continues its strike, and we are even hearing rumblings of potential strikes in the hospital sector. One of the unions representing nearly 80,000 workers at Kaiser Permanente, one of the largest hospital systems in the country, has authorized a strike if a deal isn't reached by the end of the month.

• Worker strikes are a result of the recent inflationary environment we experienced
• As workers see their cost of living increase and don’t feel their wages keeping up, they demand higher pay
• This creates a self-reinforcing cycle of sorts as companies are forced to either increase prices to compensate for higher wages or their profits decrease
• If inflation remains structurally high, expect to see labor unions gain popularity not seen since the 1970s

Government shutdown looms

With Kevin McCarthy failing to appease the hard right wing of his party, the probability of a government shutdown increased this week. Without a stop-gap spending bill passed before the end of the month, the federal government will be forced to begin shutting down various agencies. A shutdown is expected to erase 0.2% from economic growth for each week that it lasts.

• The failure to advance the spending bill was due to 6 of the far right-leaning members of the House voting against it
• The far-right faction of the House wants more action as it relates to their opposition of funding the Ukraine war, our large debt load, and the ongoing border crisis
• The Senate may take the opportunity to vote on a short-term bill next week to prevent a shutdown
• However, the uncertainty is generally not good for financial markets, and the potential headwinds for the economy come at a precarious time

‍